Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US

Lai-Ha Chan April 8 2019

Abstract Australia’s growing economic relations with Beijing in the past decade, in the midst of the rise of China, has sparked a continuing debate inside Australia about whether China is a friend or foe of Australia and accordingly about the premium that ought to be placed on the Australia-US security alliance. It has given rise to some assessments that Australia is now faced with a choice between China and the US. This paper, however, puts forward an argument that this binary choice is misplaced and that Canberra should avoid choosing one side at the expense of another. It makes the case that as a middle power, Australia should instead use ‘strategic hedging’, a combination of engagement and indirect/soft balancing strategy, to insure itself against the potential of China’s regional domination amid uncertainty about US strategic commitment to the Asia-Pacific region. Australia should continue its economic engagement with China and maintain its robust political and military ties with the US while seeking the opportunity to broaden the breadth and depth of its relations with other regional states. The 2017 Australian Foreign Policy White Paper has, to a certain extent, implicitly adopted this hedging policy by promoting the use of a mixture of balancing and engagement strategies to counter China’s regional domination. However, Australia’s hedging policy has yet to reach its full potential and can currently be described as ‘under-hedging’, i.e., not doing enough to reduce uncertainty about the future and risk. While the Turnbull government (2015-2018) had showed a strong commitment to working with the US, Japan and India in building a ‘free and open Indo-Pacific’, and the Morrison government has maintained this commitment, the weakest links of Australia’s hedging are in the failure to institutionalise the Quad, the informal strategic dialogue comprising Australia, the US, Japan and India, and to enmesh regional powers, notably India and Indonesia. Without enlisting more partners more firmly to its side, Australia is often sidelined by the other three members of the Quad and acts quite alone in the Indo-Pacific region.

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 1 ‘As a sparsely settled continent on the edge rights [to] foreign policy [with the US]’ and advised of Asia, dependent on global markets for its that ‘it’s time to cut the tag’ with American foreign prosperity and on distant allies for its security, policy as Australia cannot risk supporting the US at Australia has faced as the central question of the expense of its trading relationship with China its foreign policy not whether it should engage (Sales and Wearring, 2017). In academic circles, some actively with the world, but how it should do so’ also proclaim that China has ‘wooed Australia’ by (Gyngell, 2005: 99). ‘aggressively promoting the importance of China’s demand for natural resources to the Australian Introduction economy’ (Kurlantzick, 2007: 214). As the largest trading partner of Australia since 2007, China has Since the end of the Second World War, Australia made use of its economic and commercial ties to has relied on the US as its security provider, and usurp a role previously held by the United States. is regarded as a ‘dependent’ ally of the US in the As Ikenberry (2016) has observed, there is a ‘dual Asia-Pacific (Bell, 1988). It is a member of the Five hierarchy’ in the Asia-Pacific region. Previously the Eyes intelligence sharing arrangement as well as a US upheld both economic and political hierarchies. staunch supporter of the Australia-New Zealand- However, as the second largest economy of the world United States security alliance (ANZUS). However, and the largest trading partner of many countries in Australia’s ever-deepening economic ties with China the region, China is now dominating the economic in the midst of China’s ascendancy has caught it in hierarchy while the US can only take the helm of the between China and the US (Lieto, 2016). Increasing security hierarchy. Australia’s economic relations concerns about Chinese influence in Australia have with China ‘[have] generated a degree of alliance drift sparked a continuing debate about whether China is between Australia and the United States’ (Thomas, a friend or foe and accordingly, about the premium 2015: 846). that ought to be placed on the Australia-US security alliance. However, opposing views with respect to Australia’s choice between the two powers also abound. Some Strategist Hugh White (2010) bluntly pointed out argue that Canberra needs to maintain its strong that Australia would almost certainly be faced military and political relations with Washington and with an unpleasant choice between its biggest join American efforts to balance against China’s trading partner (China) and its long-standing rise. The reason they proffer is that Australia shares security provider (the US). A looming problem for the same values, i.e., a democratic political system, Australia, White observed, was that while it hoped liberal economy and a commitment to the rule of law, its economic relations with China would continue to with the US (Shearer, 2011). In analysing Australia’s grow, it simultaneously expected America to remain response to a rising China, Manicom and O’Neil the strongest military power in the region and to (2010: 23) reached the conclusion that ‘while there is maintain its commitment to serving as Australia’s some evidence of Australia accommodating Chinese ultimate protector. To achieve these twin goals, White strategic preferences in Asia, there is no indication urged Australian policymakers to act as a mediator that it is realigning itself strategically towards between Beijing and Washington and nudge them China and away from its long-standing ally, the US’. into forging a power-sharing arrangement in the Tow (2012: 79) also observed that Sino-Australian region. Since then, the debate about the role and relations ‘would not occur at the expense of the position of Australia between the US and China Australia-American relationship’. In describing the has continued and intensified, noticeably among interrelationship between economic factors and policymakers and in the academic and policy analysis alignment decisions, Reilly (2012: 393) sums up that circles within the country. in the Australian case, economic dependence and security alignment ‘are inversely related’ – ‘greater Some argue that Canberra has not had an economic dependence encourages balancing independent China policy and should pursue behaviour’. one, establishing a greater policy autonomy from Washington. For example, Malcolm Fraser (2014), a The lively debates on how Australia ought to manage former Liberal prime minister, pointed out that the its relationships with China and the US appear to Australia-US alliance embodies ‘dangerous’ strategic have become more robust in the wake of the release ties with Washington. Paul Keating, a former Labor of Australia’s 2017 Foreign Policy White Paper, the prime minister, criticised Australia’s ‘tag-along first such document since 2003. Not only does it

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 2 provide a broad blueprint on how Canberra should aimed at avoiding (or planning for contingencies safeguard its national interests in terms of its in) a situation in which states cannot decide upon economic prosperity and national security when more straightforward alternatives such as balancing, the international environment is ever-changing, bandwagoning, or neutrality.’1 Goh argues that states it specifies, more crucially, how Australia should instead ‘cultivate a middle position that forestalls respond to the rise of China, especially in light or avoids having to choose one side at the obvious of allegations that China attempted to meddle in expense of another.’ Using Southeast Asian states Australian domestic politics by funneling political as case studies, Goh’s research finds that the donations to Australia’s major political parties hedging policy adopted by these countries includes through Chinese business diaspora in the country three major elements. It entails, first, indirect or (Cave, 2017a). soft balancing with the need to persuade the US to counter China’s influence; second, engagement with However, the above analyses are premised on the China at various levels; and, third, involving regional hidden yet mistaken belief that there is only a ‘binary powers to ensure a stable regional order (Goh, 2005: choice’ – either China or the US – without any viable viii). She describes how a ‘hedger’ employs a mixture ‘third way’ or alternative available to Australian of balancing strategy in addition to engagement as policymakers. In contrast, this paper asserts that ‘insurance against the uncertain present and future there is an alternative to this binary choice: hedging. intentions of target states’ (emphasis added). For her, hedging is a ‘luxury of the relatively weak only’ What is hedging? because great powers cannot lay claim to hedging strategy. Hedging should be used by a relatively weak The term ‘hedge’ comes from investment and state to adopt a middle position, a combination of finance circles. The simplest explanation of hedging engagement and indirect/non-specific (including is ‘insurance’ – that is, insuring against a negative soft) balancing, towards another state (Goh, 2006). event or expected shortfall. In order to minimise exposure to various risks, investors seek the optimal While the 2017 Australian Foreign Policy White Paper hedging strategy to offset the risk of a negative event makes no mention of the word ‘hedging’, it is not (Branger and Schlag, 2004). Buying homeowner’s hard, if the paper is deciphered carefully, to find that insurance is one example of a hedging strategy. it aims to use a mixture of balancing and engagement Obviously hedging is not without its costs as, to use strategies, echoing much of Medeiros’ and Goh’s the homeowners insurance example, the hedger descriptions about ‘hedging’ (Australian Government has to pay for the insurance to mitigate unexpected Department of Foreign Affairs and Trade, 2017a). losses and uncertainty. It contains a speculative More specifically, it attempts to insure its sovereignty element and is motivated by a desire to protect from and security against any formidable uncertainty. On loss and to offset the risk of any negative event by the one hand, Canberra has cultivated economic using different instruments strategically (Johnson, engagement and partnership with China and the 1960). Association of Southeast Asian Nations (ASEAN). On the other hand, it simultaneously pursues strategic In the field of international relations, hedging can alliance with the US and informal alliance with be broadly defined as a strategy composed of other like-minded democratic countries such as ‘engagement and integration mechanisms’ on the via the Quadrilateral Security Dialogue (the ‘Quad’). one hand, and ‘realist-style balancing in the form This forms a hedge against military threats from or of external security cooperation’ on the other. Yet, domination by China, particularly in the South China the state which pursues strategic hedging does not Sea, through which trade worth US$3,370 billion ‘openly [talk] about such hedging strategies per se, passed through in 2016 (Council on Foreign Relations, especially the security balancing’ (Medeiros, 2005: 2018), as well as a soft balancing against China’s rise. 145). Australian National University academic Evelyn Goh adopts a similar but more rigorous definition of A successful hedging policy is required to insure hedging, which she describes as ‘a set of strategies Australia against negative future scenarios or unexpected shortfalls. This paper aims to analyse

1 While realists, such as Stephen Walt (1987), argue that the motivation for states to choose either bandwagoning or balancing is similar and they both have the same goal to achieve greater security, Schweller (1994) rebuts this argument and asserts that realists have overlooked the opportunistic aspect of bandwagoning. The motivation for bandwagoning is completely different from that for balancing. While balancing is purely driven by the desire to protect national security and always entails costs, bandwagoning is driven by the opportunity for gain and is often done voluntarily.

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 3 Australia’s strategic hedging in the broader Indo- to the South China Sea territorial disputes with the Pacific and argues that Australia has yet to reach its Philippines and to accept tribunal’s ruling against full potential. If one considers a hedging spectrum2 it in July 2016 was alarming.3 China’s policy stances in which to situate Australia with respect to its and preferences have been changing over the course Indo-Pacific policy – ranging from ‘under-hedging’ of the growth of its material prowess. During the Third to ‘hedging’ to ‘over-hedging’ – Australia’s current United Nations Conference on the Law of the Sea hedging policy is ‘under-hedging’. One may need negotiations (1973-1982), China was a low-income to bear in mind the difficulties of crafting and developing state. It sided at the time with other implementing an optimal hedging policy. Although coastal developing states in opposing a proposal all accept that hedging as a risk management from the more developed Japan and the Soviet Union strategy is designed to reduce uncertainty about that their ‘historic rights’ to the fishery resources in the future and risk, one may not be able to give a the waters of coastal states be preserved. Now as correct assessment of the level of risk involved. An a much more powerful state, China paradoxically analogy is that in purchasing an insurance policy, argues that it has ‘historic rights’ to living and non- one may under-assess or over-assess the potential living resources in what has become the exclusive risk, giving rise to under-hedging (the gains from the economic zone (EEZ) of a coastal state in the South offsetting investment being far below the loss) and China Sea (Beckman, 2016: 179). Australia therefore over-hedging (paying excessive premium for a risk cannot rule out the danger that China is not prepared that rarely happens) respectively. to comply with international law if it is not to its liking or does not suit its prevailing interest. Regional This paper proceeds in three steps to unfold peace and order may only be effectively preserved Australia’s hedging policy: (1) What are the negative by a balance of power, as suggested by geostrategic scenarios that Australia seeks to hedge and insure analyst Brahma Chellaney (2018) among other against? (2) How can Australia hedge – what options neorealist thinkers. It is not in Australia’s interests to are available for Australia? (3) How far has Australia jump on the bandwagon of China for economic gain pursued the hedging policy in successfully achieving without considering regional peace and security.4 both prosperity and security? In the security realm, Canberra takes a tough position What to hedge and insure against? towards the rise of China and reemphasises its security alliance with Washington. During a visit to Broadly speaking, there are three different scenarios Los Angeles in January 2017, then-Foreign Minister Australia seeks to hedge and insure against. They Julie Bishop called for ‘more US leadership, not are: (1) China’s regional domination; (2) economic less’ in the region (Wroe, 2017). To further align with insecurity and downturn due to shrinkage in trade Washington’s call for a ‘free and open Indo-Pacific’ and investment; and (3) national security threats. (FOIP), the 2017 Foreign Policy White Paper stressed the importance of the Australia-US strategic alliance 1. Insuring against China’s regional domination for the region and calls for a ‘rules-based’ regional order. It states that ‘our alliance with the US is critical Australia’s foremost concern is China’s domination to Australia’s approach to the Indo-Pacific … [t]oday, of the Asia-Pacific politically and militarily. Many China is challenging America’s position’ (Australian policymakers in Australia have been pondering Government, 2017). Overall, the White Paper calls for whether an undemocratic China, ruled by the stronger engagement with the US in order to fend Communist Party, can be restrained by international off security risks to Australia. One of the strategies law, norms and rules. With newfound power, will China to balance China’s rising power in the Indo-Pacific is become a revisionist and expansionist state, posing to ally with like-minded regional states, notably the an existential threat to Australia as well as regional United States, Japan, and India, in reactivating the peace and security? China’s refusal to participate in Quad as a hedge against military threats from a rising the proceedings of the arbitral tribunal with regard

2 This term was inspired by Bob Carr, Director of the Australia-China Relations Institute (ACRI) at the University of Technology Sydney (UTS). My thanks go to Professor Carr and James Laurenceson, ACRI UTS Deputy Director, for pointing out this ‘hedging spectrum’ in our email correspondence. 3 See Permanent Court of Arbitration (PCA) case number 2013-19. The tribunal was constituted under Annex VII to the 1982 United Nations Convention on the Law of the Sea (UNCLOS) . 4 See Schweller (1994) for a classic study of bandwagoning in international relations, and note 1 above.

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 4 China, thereby maintaining peace and security in the (i.e., grain, mineral resources) to services (tourism, South China Sea.5 education, finance and insurance, etc.).

The Quad was initially established in 2007. However, Despite the global financial crisis of 2007-2008, just a year after its establishment, Canberra Australia-China trade relations have continued to withdrew from it in 2008 following the election of the flourish. In 2016, Australia-China bilateral trade Australian Labor Party, led by Kevin Rudd. Rudd took accounted for nearly one-third of Australia’s Canberra out of the Quad 1.0 arrangement for fear total external trade. Nearly a third (32 percent) that the strategic alliance would adversely affect of Australia’s total exports in 2018 went to China its economic relations with China (Shearer, 2017; (Trading Economics). Both countries signed the Wyeth, 2017). Ironically, Australia’s renewed interest China-Australia Free Trade Agreement (ChAFTA) in in the Quad, resulting in Quad 2.0, is also largely due 2015, which entered into force later that same year. to China. The common perception across all four Since then, bilateral trade volume has surged rapidly, members is the potential challenge by a rising and from A$137 billion in 2015 to A$165 billion in 2017, up more assertive China towards regional stability and 17 percent within two years (Australian Government the rules-based order (Carr, 2018). Concerns vis-à- Department of Foreign Affairs and Trade, 2018a: vis China itself notwithstanding, the fear of China’s 90). Under ChAFTA, Australia is expected to benefit domination of the Asia-Pacific also grows out of considerably from tariff cuts. 6 America’s waning commitment to the region. As security analyst Euan Graham (2018: 4) has pointed However, there is ample evidence to show that China out, the potential value of the Quad is ‘in strategically has used its economic ties with other countries as tethering a more unpredictable, self-focused United political leverage, retaliation or deterrence to pursue States’ and that Australia cannot afford ‘to be its national interests.7 Not too long ago, China has squandered’ from the Quad. In sum, while Australia’s more than once used coercive economic statecraft interest in the revival of the Quad is mainly due to after a spike in political tensions with Australia. China’s growing assertiveness in recent years, it is For example in 2017 with China in mind, Australia simultaneously part of an attempt to keep America reviewed its espionage laws and moved to ban in the region in order to counter China’s regional foreign political donations. This triggered a diplomatic domination. spat between Beijing and Canberra. In February 2018, after an accusation by then-Minister for International 2. Insuring economic security and growth Development and the Pacific Concetta Fierravanti- Wells of China’s infrastructure aid to the Pacific as Australia is seeking to insure against isolation from ‘white elephant’ projects, China swiftly retaliated by the major engines of economic growth in the Asia- issuing a safety warning to all Chinese students in Pacific or over-dependency on any single market. Australia, posing a threat to Australia’s A$28 billion Australia has witnessed an influx of Chinese foreign international education exports, of which Chinese direct investment into its mining and agricultural students account for more than 31 percent (Smyth industries since 2005. China has been the primary and Hancock, 2018). source of Australia’s economic growth in the past decade, being its largest export market since In November 2018, China launched a year-long anti- 2009. Since then, China has become Australia’s dumping investigation into Australian barley, one of indispensable trading partner, largely due to China’s Australia’s major export products. It was seen as one insatiable demand for mineral resources and of its tit-for-tat strategies retaliating for Canberra’s agricultural products. In the past few years bilateral decision to expand its naval base on Manus Island trade has also extended beyond merchandise goods in order to counter China’s growing influence in the

5 The Quad originated in the 2004 Boxing Day tsunami along the coasts of most landmasses bordering the Indian Ocean, which caused immense damage. Four democratic powers – Australia, India, Japan and the United States – proposed an informal cooperation to offer military hardware and humanitarian relief to the affected areas (Shearer, 2017). This event highlighted the potential maritime cooperation between these four democratic states. Japan’s Prime Minister, Shinzo Abe, in 2007 initiated the transformation of this informal alliance into a more strategic partnership with a desire to balance the rise of China. This four-way strategic dialogue, known as the ‘Quad’, was designed to preserve the common interests among them. The Australian government also signed a Joint Declaration on Security Cooperation with Japan that year. 6 Under ChAFTA, China’s tariff for products of Australian origin is eliminated on the day of entry into force or uses the tariff rate in 2013 as a ‘base rate’ to gradually lower the percentage and that will be eventually reduced to zero (Australian Government Department of Foreign Affairs and Trade, 2016a: 6). 7 For example, Lai (2018) uses China’s economic sanctions towards North Korea, Japan, the Philippines and Norway as cases to examine China’s coercive diplomacy; and Zhou & Zhang (2017) look at how China uses anti-dumping measures as a way of protection, retaliation, industrial development and export promotion.

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 5 region (Lockett, 2018). Under ChAFTA, China pledged approach to foreign policy, as clearly shown in the to eliminate the tariffs on barley from Australia and, murder of Saudi dissident and Washington Post as such, more than 67 percent of Australia’s barley columnist Jamal Khashoggi in 2018. Trump has is exported to China, accounting for A$1.2 billion refused to confront Saudi Arabia, particularly its annually (Lockett, 2018; Australian Export Grains Crown Prince, Mohammed bin Salman, because of his Innovation Centre, (no publication date)). In light of concerns over job losses in the US military industry China’s practice of economic coercion in responding sector and Iranian influence in the Middle East. He to any diplomatic row, Australia should insure itself would not be prepared to harm US-Saudi relations if against external economic coercion in order to Saudi Arabia in return took action to press down the reduce its economic dependency on China and to oil price (Hohmann, 2018; Mazzetti & Hubbard, 2018). protect its economic growth. As early as 2016, during his presidential campaign, Trump explicitly indicated that other countries 3. Insuring its national security had to pay the US for security protection. Asian countries, particularly those that have heavily relied As mentioned earlier, Australia has relied on the US on the US for security protection, started to harbour as the security provider for a long time. However, doubts about the reliability of the US commitment Australia may view with equal scepticism US current as a counterbalance to China (and North Korea) in policy to the region. What will happen if the US the region. South Korea and the US were once at withdraws part of its security commitment under loggerheads over the Korean share of the cost of Trump’s ‘American First’ policy? Staying aloof from stationing 28,500 American troops on the Korean the world had long been a defining feature of US soil. In the five-year (2014-2018) agreement about foreign policy until World War II (Rose, 2019). In light cost sharing, South Korea paid ₩960 billion (US$848 of the strained relations between the US under the million). The Trump administration asked the South Trump administration and its traditional allies in Korean government to increase its contribution by Europe, Australia must not be complacent about 50 percent to more than ₩1.4 trillion while Seoul American sustained engagement and alignment did not want to commit more than ₩1 trillion (Korea with its post-war partners in Asia. In addition, JoongAng Daily, 2019; Shin, 2019). Eventually in Australia has to be mindful of the ideological February 2019 they reached a short-term deal for proclivities of Trump. He (and John Bolton, his current a year only in which South Korea would pay ₩1.04- National Security Adviser) have a strong aversion 1.05 trillion (US$925-930 million) (Choe, 2019; to multilateralism. His administration has declared Song, 2019). Trump has demonstrated in the cases withdrawal from several international agreements, mentioned above his reluctance to take up the global including the Trans-Pacific Partnership (TPP), the responsibility for preserving the liberal international Paris climate agreement, the Iran nuclear deal order, including the protection of human rights and (formally known as the Joint Comprehensive Plan democratic values. For him and his supporters, it of Action) and the Intermediate-Range Nuclear is too costly for the US to play the role of the sole Forces Treaty of 1987. Trump has been critical of global hegemon maintaining the liberal international international institutions such as the United Nations order. Australia cannot therefore take his rhetorical (UN), the World Trade Organisation, the European commitments to East Asian security and the Quad 8 Union and the North Atlantic Treaty Organisation. for granted, and must be prepared to invest in In addition, there are signs that Trump himself is institution-building in the region jointly with other not interested in Asian affairs. He has not taken like-minded states and to demonstrate its strategic part in the East Asia Summit (EAS) since November utility to the region in order to make a ‘deal’ with the 2017 and also skipped the Asia-Pacific Economic US to persuade it to remain. Cooperation (APEC) meeting in Papua New Guinea in November 2018 (Mahtani, 2018).9 One may ask whether a president following Trump would lessen the need for a hedging foreign policy. Last but not least, Australian political leaders may This is probably unlikely because a bipartisan need to be concerned about Trump’s transactional consensus on a hardened China policy has taken

8 The US, under the Trump administration, announced its withdrawal from the UN Educational, Science and Cultural Organisation (UNESCO) in October 2017 and from the UN Human Rights Council in June 2018. See also Trump’s speech to the UN General Assembly in September 2018 in which he stated that his government rejects globalism: https://news.un.org/en/story/2018/09/1020472. 9 The year 2018 is the second consecutive year that Trump has skipped the East Asia Summit. In November 2017, Trump toured five states in Asia in 12 days. The last stop was in Manila, the Philippines where he was then supposed to attend the East Asia Summit. However, he left Manila a few hours earlier than planned and skipped the East Asia Summit on November 14 2017 (Reuters, Associated Press 2017).

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 6 shape at the national level in the American polity. The as ASEAN, India and Japan. The last two may be emergence of this national, bipartisan consensus conceived of as the key elements of a soft-balancing is less due to Trump’s policy preferences and policy. personality than to the growing perception in both Democratic and Republican national leaders that 1. Engaging China economically a non-democratic China is posing imminent threat to US security, as shown in the alleged ‘technology Engagement is in the interests of both Canberra and theft’, espionage (discussed further below), Beijing. Figure 1 shows that China is currently the massive acquisition of Western technology firms, largest trading partner for Australia. Their two-way China’s military modernisation and its militarisation trade reached A$183 billion in 2017, of which Australia of the disputed (artificial) islands in the South enjoyed a huge trade surplus with China. Australia’s China Sea, China’s leadership in the creation of total trade with China was also much higher than new international institutions (such as the Asian that with its second largest trading partner, Japan Infrastructure Investment Bank (AIIB)) and the Belt (nearly A$72 billion), by more than A$111 billion. As and Road Initiative (BRI), 10 and the strengthening of previously mentioned, China has been Australia’s Xi’s dictatorial leadership of the Chinese Communist top trading partner since 2007. Although Canberra Party and the state11 (Shambaugh, 2018; Leung and declined to endorse Beijing’s proposal to align Depp, 2019). A Democratic US president may be and link Australia’s A$5 billion Northern Australia more receptive to a multilateral approach to handling Infrastructure Facility to China’s BRI, both countries the ‘China threat’ but is unlikely to soften US policy did sign a memorandum of understanding (MOU) on towards China. More importantly, irrespective of who cooperation in investment and infrastructure in third is US President, s/he will not change China’s policy countries during Chinese Premier Li Keqiang’s visit to preference and behaviour. Australia in March 2017.

It therefore makes sense for Australia, as a middle However there is also a growing concern over power, to use a combination of engagement and China’s acquisitions of Australia’s land and major indirect/soft balancing strategy to insure itself infrastructure in the country. The decision of the against both economic downturn and dependency, Northern Territory government to lease part of the and China’s regional domination, in light of the Port of Darwin to Landbridge Group, a Chinese uncertainties about Chinese intent in and US company, for 99 years, in 2015, sparked a heated strategic commitment to the region. In practical debate about that deal. The Australian Strategic terms, Australia should continue engaging with China Policy Institute (ASPI), a think tank based in and other regional states in multilateral trade and Canberra and set up by the government, slammed investment; but it is simultaneously sensible for it to this transaction, arguing that it was ‘a strategic strengthen partnerships with regional states and the risk for Australia’ and that the government should US to counter-balance China indirectly and softly in reconsider ‘how Australia deals with the national the security realm. security implications of foreign investment proposals’ (Barnes et al., 2015). ASPI alleges that Landbridge is How to hedge: Australia’s hedging well connected with China’s military and the lease will potentially allow the Chinese government to options spy on American marines based in Darwin (Barnes et al., 2015; Forsythe, 2015).12 However, the link How can Australia hedge against the aforementioned between Landbridge and China’s military has not potential negativities in the Indo-Pacific region in been confirmed. It was Landbridge, according to The order to insure its economic and national securities? Australian Financial Review, which wanted use the What options are available for Australia? The hedging acquisition to build ties with the Chinese government options can be divided into three groups, namely ‘rather than Landbridge being a cog in Beijing’s (1) engaging China economically; (2) keeping the strategic ambitions at the time it purchased’ (Grigg, US on board; and (3) involving regional powers such

10 Note that both the Obama and Trump administrations share in not signing up to the AIIB and not endorsing the BRI. 11 China’s legislature, the National People’s Congress, made a constitutional amendment in March 2018 that scraps the two-term limit on the country’s presidency, effectively allowing the incumbent Xi Jinping to rule the country for life (Buckley and Myers, 2018). 12 Under the ‘strategic rebalance to Asia’ policy undertaken by the Obama administration, Canberra and Washington agreed to deploy 2,500 US Marines to Darwin in 2011 and both countries have since then been running joint military exercises in Darwin.

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 7 2017).13 In addition, the Australian Department of investment from Chinese state-owned or controlled Defence also stated that there were no defence or enterprises (SOEs/SCEs) (see pp. 10-11 on state strategic grounds for opposing Landbridge’s bid for capitalism), it should consider Chinese investment the Port of Darwin. Julie Bishop, then the Foreign case by case, rather than use a broad-brush Minister, also aligned with the Defence Department, approach. Economic engagement with China should reiterating that the government had ‘no security remain one of the core strategies of Australia’s concerns’ about the Landbridge investment (Bishop, hedging policy. 2018; and Laurenceson, 2018: 73). 2. Keeping the US on board Nevertheless, since the Landbridge acquisition of the Port of Darwin, there have been growing concerns Australia, as a liberal democratic, Western country, over increasing Chinese influence. Australia has still remains closer politically and ideologically to often used a ‘one-size-fits-all’ policy to block the US than to China. However, it is simultaneously all high-profile Chinese investment in Australia, concerned about Trump’s abdication of US global including in the electricity company Ausgrid, in the leadership. Not only Australians, but also many beef producer S. Kidman & Co (which ultimately people in the world do not believe that the US received approval to sell its 10 million-hectare now has the qualities a global leader should have. farm to Australian mining magnate Gina Rinehart According to an extensive survey conducted by and a Chinese company in 2016, with the Chinese Gallup in 134 countries around the globe in 2018, the company taking a one-third minority stake), and in approval of American leadership has substantially the exclusion of Huawei and ZTE from involvement dropped by nearly 20 percent in less than one year in Australia’s 5G mobile network in 2018. While this after Trump took over the office from Obama in early paper asserts that Canberra should be more vigilant 2017 (Baker, 2018). about China’s investment, especially in relation to

13 Accordingly it was the chief executive of Landbridge, Ye Cheng, who tried to bring the port to join China’s BRI after the acquisition in the hope of accessing cheap funding from the Chinese government (Grigg, 2017).

Table 1. Australia’s top 10 trading partners in 2017 (Unit: A$ million)

Country Exports Imports Total bilateral trade

China 115,996 67,397 183,393

Japan 47,240 24,612 71,852

United States 20,972 47,491 68,463

Republic of Korea 23,366 31,930 55,296

India 20,160 7,276 27,435

New Zealand 14,036 13,396 27,433

United Kingdom 11,536 15,092 26,628

Singapore 11,961 13,413 25,374

Thailand 5,781 17,238 23,019

Germany 4,046 16,694 20,739

Source: Australian Government Department of Foreign Affairs and Trade (2018)

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 8 While currently China cannot dominate the region of navigation (Grossman, 2018b). In view of the militarily unless the US lets it do so, Australia should ambiguity and the overall perception of waning not stand idly by and wait for the US to lead. Rather, it US commitment to Asia, US Vice President Mike should have a more independent and more proactive Pence tried to reaffirm Asian countries of US foreign policy. From a historical perspective, Australia commitment to the region and clarify the importance has not had any war with China – whereas India, of the Indo-Pacific to Washington’s foreign policy. Japan and the US have – and so it would be in a Before his tour of Asia, in which he represented better position to play a leadership role in the region. the US in lieu of Trump in the ASEAN summit and The essence of hedging espoused in this study is APEC in November 2018, Pence elaborated that not to choose between China and the US (a binary Washington’s Indo-Pacific strategy rests on three choice) but to bring more partners to the side of broad pillars: economic prosperity, security and the Australia. To achieve this, Australia should formalise rule of law (Pence, 2018). In the security realm, the the Quad, ally with other like-minded democracies US will continue to work with like-minded states to to strengthen its diplomatic and military capacity confront threats facing the region. Trump’s US$60 to counter China’s domination and assertiveness, billion infrastructure fund is one of the measures to and develop a more independent yet multilateral counter China’s economic and security influence foreign policy. Simultaneously, it can also strengthen (Pence, 2018). Amid rising anxiety about China’s its bilateral relations with other regional powers infrastructure development in the Asia-Pacific including other Quad members, while keeping the US region, Washington created a new development on board. agency – the US International Development Finance Corporation (USIDFC) in early 2018. In addition to Multilateral arrangement: A more formalised Quad the government’s US$113 million direct investment, USIDFC will raise its spending cap to US$60 billion Multilaterally Australia may ponder leading the by crowding-in-private investment. It will allow institutionalisation of the Quad, with its Secretariat American companies to compete overseas and stationed in Canberra, to make it less ad hoc and create a ‘preference’ for US investors (Kuo, 2018). more functional, and to make the new notion of the According to two analysts at the Center for Strategic Indo-Pacific operational at policy level. and International Studies think tank, this new USIDFC is ‘absolutely … a response to the challenge of China’ In his proposal of a concert of Indo-Pacific (Runde and Bandura, 2018: 4). US Secretary of State democracies, Brahma Chellaney (2018) suggests that Mike Pompeo also indicated at the Indo-Pacific Japan and India should be the cornerstone of efforts Business Forum in Washington in July 2018 that to ‘institutionalise’ the Quad initiative. But on how this initiative would involve a trilateral investment they should conceptualise the institutionalisation, agreement among the US, Japan and Australia (Shi Chellaney provides few details. So far all four and Churchill, 2018). countries of the Quad have only managed to rhetorically emphasise the importance of their Despite Pence’s assurance about US commitment cooperation for protecting the freedom of navigation to the region, Canberra should not solely rely on the and maintaining a rules-based order in the Indo- US to act for its security protection. During a major Pacific. However, there is not much substance in speech at the German Marshall Fund in Brussels this rhetorical sloganeering. It is also argued that in December 2018, Pompeo not only criticized the ‘[the four countries of the Quad] tend to say what UN and its agencies, but also questioned the value the Quad is not rather than what it is’ (Curran, 2018). of multilateralism. According to him, based on Japanese Prime Minster Shinzo Abe emphasised that ‘principled realism’, every nation must consider its all four countries of the Quad ‘share strategic values’; responsibilities to its citizens and make sure that the however, he at the same time pointed out that the ‘international order serves the good of its people’ revival of the Quad ‘does not mean necessarily (Pompeo, 2018). In other words, multilateralism must engaging in any military activities’ (Stutchbury work for Americans in order for the US to support. By and Grigg, 2018). This ambiguity is perhaps largely the same reasoning, we have to be mindful that the because it was only revived in November 2017 with Quad must benefit the US in order for Washington to Australia’s return to it and still remains an informal lend support for it. grouping. To ensure that the Quad will not dissolve again, Thus far, the revived Quad has yet to hold any Australia should take the lead and try to make joint exercises in the name of protecting freedom

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 9 the Quad more functional and make the notion is remarkable. In 2000 only 10 Chinese companies operational at policy level. Setting up a secretariat managed to be on the list; 10 years later in 2010, in Canberra and upgrading the Quad’s activities there were 46 Chinese companies (Cendrowski, to ministerial level consultations are two viable 2015). The majority of the Chinese firms on the list are options to institutionalize the Quad. Ultimately, it SOEs/SCEs, directly or indirectly controlled by the was Australia that pulled the plug on Quad 1.0 a central government via the State-owned Assets and decade ago, and was thus deemed to be one of the Supervision and Administration Commission (SASAC). two weaker links (together with India) among all four countries (Graham, 2018: 5). To shed the negative As the nexus between government and corporations image that Canberra might get cold feet and to is shaped top-down by the Chinese government, affirm Canberra’s long-term, strong commitment to SOEs/SCEs are allegedly an important instrument this informal alliance, Australia needs to be more of the Chinese authorities for achieving the state’s proactive in initiating a formal agreement among the economic and strategic objectives. Due to the members of the Quad. Therefore, instead of leaving state-controlled and strategic nature of Chinese it as a loose, informal setting, a more formalised and investment, the US has led the calls for greater institutionalised Quad could serve as an enabler to scrutiny of Chinese investment in the West. Huawei is strengthen security cooperation among four liked- a case in point. minded states under the framework of Indo-Pacific geographical concept (Singh, 2018). By doing so, Huawei is the world’s largest supplier of the Quad could engage in more military exercises telecommunications network equipment. While it and should strive to put the Malabar naval exercises claims that it is not a state-owned but an employee- within its orbit. owned enterprise, it is regarded as a ‘state- controlled enterprise’ (Wyeth, 2018).14 Many Western Aligning with the US: Vigilance on state capitalism countries are concerned over the background of Huawei’s founder, Ren Zhengfei, who was an engineer We have witnessed the growing involvement of in the People’s Liberation Army (PLA) in 1974-83. Its China’s enterprises in infrastructure development mysterious ownership structure, fuelled by the claim spanning from Africa to the countries along the that Ren holds only a one percent stake in Huawei, current BRI. Due to the growing concern over further causes suspicions that the company is de Chinese investment and the ‘grab’ of Australia’s facto run by the Chinese authorities behind the properties, the government released the figure of scenes and that its overseas ‘commercial’ investment foreign owners of agricultural land in Australia in is a cover for espionage (Davies, 2018). It is also 2016. It indicated that 13.6 percent of Australian suspected that Huawei’s equipment may contain agricultural land was owned by or leased to foreign ‘back doors’ for use by Chinese intelligence officials. companies. However, China is by far not the biggest This security concern is further stoked by Chinese investor. It is the United Kingdom which holds 52 legislation which requires domestic firms to assist percent of agricultural land held by foreign investors, China when they are asked to (Weber, 2018). The followed by the US, the Netherlands, and Singapore. retaliatory action taken by the Chinese government Comparatively, Chinese investors only hold 0.38 against Canadians in China in response to the arrest per cent of Australia’s agricultural land (Farr, 2016). of Huawei’s Chief Financial Officer Meng Wanzhou, At issue is why attention has been focused on the daughter of Ren, by Canadian authorities on Chinese investment and why it is that mostly Chinese suspicion of violating US trade sanctions against companies are facing scrutiny. One of the reasons is Iran deepens the speculation that Huawei is not a that most of the Chinese companies are state-owned genuine private enterprise in China (Magnus, 2018). or –controlled enterprises (SOEs/SCEs). For example, John McCallum, Canada’s ambassador to China, on the 2018 Fortune Global 500 list, a ranking of the revealed in January 2019 that Xi had been angered 500 largest global corporations based on revenue, over the Meng’s arrest and speculated that it might 120 are Chinese companies. The number of Chinese be because Huawei is ‘a national flagship company of companies on the list is second only to the United China,’ ‘not just any company’ (Gilles, 2019). States with 126 companies. If 2018’s figure is compared with previous years’, China’s achievement

14 Key to Chinese enterprises is not who nominally ‘owns’ the enterprises, but who has the right to use the property of the firms, who has the right to earn income from the property and who has the right to transfer the property to others. In state-owned or –controlled enterprises, it is always party- state cadres rather than the nominal owners hold the rights. In other words, all major decisions are made by cadres.

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 10 In 2008, Australia tightened its foreign direct suppliers carefully when building 5G networks (Fildes, investment (FDI) regime as a defensive move that 2018). Although Canada has not barred Huawei targets Chinese investors mainly (Wilson, 2011). In from participating in the development of Canada’s August 2018, Chinese enterprises Huawei and ZTE 5G mobile network, the Canadian government has were blocked from being involved in the building of applied numerous restrictions on how the company Australia’s 5G mobile network. Its bid for Australia’s can operate in the country: for example, not being 5G network was considered posing a risk towards permitted to bid on federal contracts, nor to manage Australia’s national security. In a joint media release equipment from offshore locations, nor to bid on in August 2018, Communications Minister Mitch the core networks of Canada’s telecommunications Fifield and then-Treasurer Scott Morrison indicated, companies (Nossal, 2018). without directly naming the Chinese firms, that ‘the involvement of vendors who are likely to be subject India has also followed US move to exclude to extrajudicial directions from a foreign government’ Huawei and ZTE from taking part in its 5G network (emphasis added) would pose a security risk for in the country (Reichert, 2018) while Japan is Australia (Wyeth, 2018; Fifield, 2018). simultaneously considering a ban on these two companies (Burton, 2018). In Germany, concerns Led by the US, liberal democratic countries have over Huawei’s potential involvement in building the made a common approach to investment from country’s 5G network are also gathering traction. Huawei and ZTE. As early as 2011, the House While Germany has yet to demonstrate a firm position Permanent Select Committee on Intelligence under towards Huawei, ‘the US influence on this has really the US House of Representatives (the Intelligence intensified recently’, as an anonymous German Committee) initiated an investigation into the official pointed out (Kynge et al., 2018). potential threat Huawei and ZTE would pose to US national security. The Intelligence Committee Not only does the US lobby its strategic partners concluded in its 2012 report that although there was against investment by Huawei and ZTE, it has also no conclusive evidence of wrongdoings of Huawei established a trilateral partnership with Japan and and ZTE, there were significant knowledge gaps Australia in providing infrastructure and development about the ‘companies’ potential ties to the Chinese assistance in the Indo-Pacific region in order to push state’. The report also highlighted the ‘potential back China’s growing influence in the region. The security threat posed by Chinese telecommunications Pacific countries were the first to find themselves companies. It therefore recommended that the at the centre of this great power wrestle over government ‘block acquisitions, takeovers, or their infrastructure development. After effectively mergers involving Huawei and ZTE’ on US soil (US providing a counter offer to the Solomon Islands House of Representatives, 2012). Since then, the US and stopping Huawei from building a 4,000km-long has tried to lobby its strategic partners, including seabed cable from Sydney to the Solomon Islands in the members of Five Eyes and Germany, Japan and June 2018, Australia (together with the US and Japan) India to block Huawei and ZTE from providing 5G tried to make another similar counter offer to Papua equipment to their countries. New Guinea (PNG) in the same year (Smyth and White, 2018a). However, unlike the Solomon Islands, Among the Five Eyes, both Australia and New Zealand PNG refused the joint offer and upheld its original followed the US advice and in 2018 blocked Huawei’s deal with Huawei in building the country’s internet and ZTE’s 5G bid on the grounds of national security infrastructure project (Westbrook, 2018). (Smyth and White, 2018b). While preparing for its auction in 2019, the UK has also toughened its Australia’s continued participation in the Five Eyes stance on Huawei. Its National Cyber Security Centre is premised on the confidence the rest four have (NCSC) explicitly expressed concerns over a range in sharing secret and sensitive intelligence reports of technical issues that would pose ‘new risks in UK with it over the Internet. As US policy preferences in telecommunications networks’ (Kyngeet al., 2018) cybersecurity and cyber-threats are unambiguously and requested the company to make a series of expressed, Australia does not have much policy technical changes to its practices in the UK, which freedom but to align its policy towards China’s state would cost Huawei US$2 billion (Bond and Fildes, capitalism and its enterprises with other like-minded 2018). Together with the Department for Digital, countries in the West, notably the US. Culture, Media and Sport, the NCSC warned several UK telecoms companies of the need to consider their

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 11 3. Involving regional powers (ACSA) with Japan. Japan is well aware that it can no longer afford to rely heavily on the US for security and Another strategic hedging measure to insure defence. Japan’s delicate balancing act is that it is Australia’s security against any uncertainties is skillfully mingling with China while allying with other to broaden the breadth and depth of its relations regional powers to counter China’s rising influence. with other regional actors, including Japan and the For example, the day after a bilateral meeting with Xi Republic of Korea in Northeast Asia, ASEAN and Jinping in Beijing, Abe and Modi held their 11th bilateral its member states – Indonesia in particular – in talks in Japan (Japan Times, 2018). Southeast Asia and India in South Asia, in addition to a more formalised Quad. To insure against Working with other regional powers is one of the China’s domination which arises not only from the means for Australia to make it diplomatically stronger spectacular growth of China’s hard power and naval than it is right now. Instead of heavy reliance on modernization but also from the unpredictability of US security protection, Australia should follow the the Trump administration, Australia should bargain example of Japan. It makes sense for Australia and engage with China from a position of strength. to deepen its strategic partnership or political This can be achieved by strengthening its economic alignments with both India and Japan, to build up a and security ties with neighbouring countries. We more independent foreign policy, and strengthen its may need to note that many Chinese officials and bilateral relations with ASEAN countries, particularly diplomats are strong adherents to neorealism, with Indonesia (this is discussed further in the next believing that only power matters in international section). politics. They show little respect for weakness. To employ a Thucydidean observation, they act in the Economically, while China remains Australia’s top belief that ‘the strong do what they can, and the trading partner, it makes good sense for Australia weak suffer what they must.’ Kowtowing and making to diversify its economic engagement beyond concessions to Beijing will not serve Canberra’s long- China with other countries, such as members of term national interest. The US, India and Japan defy the Regional Comprehensive Economic Partnership China in varying degrees. Both India and Japan have (RCEP) and the TPP-11, to soft-balance against not formally endorsed China’s BRI and have territorial China’s economic domination. RCEP and the TPP-11 disputes with it. But China still feels compelled to are two elements of the economic soft balancing engage them because, among others, of the need to strategy against any pitfalls of an over-reliance on attract Japanese foreign investment and of India’s a single market. The RCEP consists of 16 member military prowess (it itself has nuclear weapons) and countries, namely the 10 member states of ASEAN its role in the Shanghai Cooperation Organization and six of ASEAN’s free trade agreement partners (SCO), the BRICS grouping, G20 as well as the (Australia, China, India, Japan, Korea and New developing world (the non-aligned movement). Zealand). RCEP accounts for almost half of the world’s population, 31.6 percent of global GDP and The Quad may facilitate the enhancement of mutual 45 percent of global economic growth in 2015 ties between Quad states or even trilateral relations (Australian Government Department of Foreign among Australia, India and Japan. This could serve Affairs and Trade, 2018b). Australia is currently as a strategic outreach for Canberra to further moving in the right direction in this respect. deepen its relations with New Delhi and Tokyo. Japan has proactively deepened its relations with several In addition, Canberra has gone to great lengths regional powers. Abe’s effort and strategic outreach to keep the TPP alive and uses it to soft-balance has made Australia15, Canada16 and potentially India17 against China’s overwhelming dominance over the sign the Acquisition and Cross-Servicing Agreement regional economy. The 12-country TPP was reportedly

15 Australia and Japan signed their ACSA in 2013 and a new ACSA in 2017 in light of Japan’s new security legislation that expanded the role of its Self Defense Force in early 2017. Under the ACSA, both countries set out the basic terms and conditions for reciprocal provision of supplies and logistical support between the Australian Defence Force and the Japanese Self-Defence Forces; (see: https://www.aph.gov.au/Parliamentary_ Business/Committees/Joint/Completed_Inquiries/jsct/16november2010/report2/chapter2). 16 Canada and Japan signed the ACSA in April 2018. 17 India and Japan have been expanding their military and political cooperation swiftly. The two countries have held bilateral maritime exercises and joint army exercises. Japan was also invited to be a permanent member of the Malabar exercises involving the US navy (Pant, 2018). Their strategic partnership has also enabled the two countries to ally in funding infrastructure projects. They jointly set up the Asia-Africa Growth Corridor (AAGC) to finance developing countries’ infrastructural investment to counter China’s BRI. AAGC, which aims to link Africa with India, Bangladesh, Myanmar, Cambodia and Laos together by sea route, was proposed by both Japan and India during the annual meeting of the African Development Bank, held in Gujarat, India in May 2017 (Nair, 2017).

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 12 the largest pact governing international commerce, the Indo-Pacific Command (Ali, 2018). Prior to the encompassing 40 percent of the world’s economic name change of the US Pacific Command, Australia output. It was deemed to be a key component of quietly renamed the ‘Asia-Pacific Group’ in its Obama’s ‘pivot to Asia’ policy in countering China’s Department of Foreign Affairs and Trade (DFAT) the regional economic dominance. In January 2017, ‘Indo-Pacific Group’ in 2017.19 Australia under the however, the Trump administration decided to pull Turnbull government (2015-2018) and the current America out of the pact and as a result, it became Morrison government (2018-) has shown a strong the TPP-11.18 Despite the absence of the world’s commitment to working with the other three Quad biggest economy, Australia, together with Japan and members to build a FOIP. This is also due to the New Zealand, led the charge in reviving the TPP. Trade strategic environment in which all of them are ministers of the 11 remaining TPP countries met in maritime powers with stakes in the Indo-Pacific. Hanoi, Vietnam in May and again in November 2017 Even the Labor Party which decided to withdraw from in Danang, Vietnam. In March 2018, a Comprehensive the Quad in 2008 now recognises its security value and Progressive Agreement for TPP was signed in (Brewster and Medcalf, 2018). Santiago, Chile; and this agreement entered into force in December after Australia, the sixth country However, the establishment of a formalised Quad of the group, ratified the agreement domestically institution is still a distant goal. All three Quad 2.0 in October 2018 (Panda, 2018b). The TPP-11 has meetings occurred on the sidelines of international yet to have any intention to invite China to join the meetings, such as APEC and the EAS, and they were multilateral trade pact but the door is said to be open limited at the assistant-secretary level. The meetings for the US to re-join it anytime (Murdoch, 2017). have been labelled ‘US-Australia-India-Japan Consultations’, rather than ‘Quadrilateral Security Has Australia hedged successfully Dialogue’, which had been used in 2007 (Ayres, 2018; US Department of State, 2018). In addition, Australia’s so far? political instability has likely undermined Canberra’s credibility at the international stage. Australia did Against the hedging options mentioned above, not participate in the trilateral meeting among the this section aims to evaluate how far Australia has other three Quad leaders during the G20 leaders’ succeeded in taking up a strategic hedging policy to summit in Buenos Aires, Argentina in December achieve both security and prosperity. Hedging is not 2018. This India-Japan-US trilateral meeting served without cost. One may theoretically buy insurance as a symbolic movement to demonstrate the three policies to cover everything and every possible countries’ common interests in the Indo-Pacific scenario but in reality few do so. The key question is (Panda, 2018a). One has to wonder why Australia was which package is the optimal, risk-minimising policy absent from or not invited to it, considering that it to offset the likely negative scenarios. Would it be has been painstakingly constructing a FOIP among under-hedging or over-hedging? all four liked-minded states. One may attribute it to the result of federal government changing hands On institutionalising the Quad: Since its revival in frequently, with six prime ministers within 10 years, 2017, the Quad has become more proactive than a largely due to ‘political coups’ within their own decade ago and held three different meetings within political parties. It is hard for other countries’ leaders one year, focusing broadly on Indo-Pacific security to acquaint themselves with Australia’s ‘current’ and a ‘free and open’ region. The latest one was held prime minister and to make deals with them.20 Talking in Singapore in November 2018 during Pence’s visit seriously with Canberra and making concessions for the ASEAN summit (Haidar, 2018). A new spatial to it would likely be a waste of time and effort. term, the ‘Indo-Pacific’, has also replaced ‘Asia- Canberra has to end this ‘coup culture’ in order to Pacific’ as the new lexicon in policy circles among maintain its international image of stability and the four countries. In May 2018, the US military also to ensure political leaders of other states to have announced that its Pacific Command was renamed

18 The TPP-11 members are Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. 19 For the organisational chart of DFAT, see: https://dfat.gov.au/about-us/department/Documents/dfat-org-chart-executive.pdf. The Indo-Pacific Group was allegedly created after DFAT published its 2017 Foreign Policy White Paper. Personal conversation with Ian Hall of Griffith University in March 2018. 20 Three months since becoming Australia’s Prime Minister, Scott Morrison met with the German Chancellor, Angela Merkel during the G20 summit in Buenos Aires, Argentina in December 2018. Merkel was seen to rely on a ‘cheat sheet’ to familiarise herself with the new Australian Prime Minister sitting next to her during their one-on-one meeting. Merkel’s ‘ignorance’ of Morrison was interpreted as that she ‘simply couldn’t be bothered’ as there might ‘be another one along in a minute’ (Wintour, 2018).

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 13 confidence in Australia’s foreign policy standing and an issue of state capitalism but instead signifies its consistency. a new US strategy to contain China under the Trump administration. American hawks believe that Another sign that Australia is not fully recognised as economic engagement with China has benefitted a Quad member state is that the four countries have China more than the US. Steve Bannon, former yet to hold any joint naval exercises so far, despite senior White House adviser to Trump, had urged their joint proclamation to preserve a FOIP. Since the government to confront China (Mitchell and Liu, 2015, Canberra has been lobbying for inclusion in the 2018). Peter Navarro, a former economics professor Malabar annual naval exercises but has so far been at the University of California, Irvine, is said to be the excluded from it by India. Shortly after the Wuhan mastermind behind the US’s trade war with China summit between Chinese President Xi Jinping and (Lowrey, 2018). The author of The Coming China Indian Prime Minister Narendra Modi in April 2018, War (Navarro, 2008) and a co-author of Death by India decided that the 2018 Malabar naval exercises China (Navarro and Autry, 2011), he has been critical would remain a trilateral matter without Australian of China’s unfair trade practices and currency participation. Although it was widely interpreted as manipulation. Pushback from the US was deemed to a concession made by India to China to allay China’s be necessary and the recent trade war is part of the security concerns over the emergence of an ‘anti- containment and wider technology war. In 2015 China China’ military alliance, there were other grounds for unveiled its ‘Made in China 2025’ policy, singling India’s rejection. They include: the lack of trust on the out 10 sectors, mainly high-tech industries, as part of India in Australia’s long-term commitments ‘core’ areas to develop. In order to increase Chinese to the Quad; Australia’s support for Pakistan in companies’ competitiveness in global production the Financial Action Task Force discussions; and and supply chains, Beijing often subsidised its SOEs Australia’s refusal to share the over-the-horizon to purchase western businesses and acquire their radar technology with India (Grossman, 2018a; technology. As argued by Sinologist David Zweig Sundaramurthy, 2018). (2018), the current ‘fight over trade is merely a skirmish in a larger technology war’ between two In order to persuade India to include Australia in superpowers. The ultimate goal of Trump is to contain the Malabar naval exercises, Australia may need China’s growth and expansion. to allay India’s lingering concern over whether Australia will withdraw from it again later. Canberra’s There is little room for Australia to stay neutral or leadership in formalising and institutionalising the indifferent in the feud between the US and China Quad will contribute to rebuilding of trust between over Huawei and ZTE, as long as Australia wants to Australia and India by demonstrating its long-term remain in the Five Eyes and to keep the US on board commitment to the institution. Canberra might in its strategic hedging strategy. The US could bar consider ‘reminding’ New Delhi of their shared the sharing of intelligence with Australia if Australia primary interests in the region. To put it simply, the network were believed to be ‘insecure’ from China’s renewal of the Quad is largely due to China and the influence or espionage. Western allies are taking fear of China’s regional domination. As all Quad steps at the policy levels to avoid or exclude Chinese members have yet to participate in China’s BRI, companies in order to preserve their cybersecurity. there are reasons for these like-minded states to Australia has to ally with the Five Eyes, mainly the US, cooperate with each other. In short, Australia needs in its policy towards China’s state capitalism in return to take steps to restore the trust between India for maintaining its security ties with the US and the and itself, and to convince India and others of the West. advantages of including Australia in the Malabar naval exercises in the building of a free and open On involving regional powers: For a long time, Indo-Pacific region. Australia has indulged itself as a Western white country, with abundant natural resources. Being On vigilance on state capitalism in the protection ‘down under’, lying between the South Pacific and of national security: As argued earlier, being a Indian oceans, its wealth and safety have enabled member of the Five Eyes, Australia is given little room Australia to act as an ‘insular and introspective for policy freedom and is instead compelled to align nation’, not interested in engaging with its Asian with the alliance’s other members, especially the neighbours actively (Wesley, 2011: back cover US, in acquiring and sharing secret and sensitive page). However, the rise of Asia and its economic intelligence information. Huawei’s case is not simply and political relevance towards Australia in the

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 14 21st century is a ‘wake-up call’ for Australia’s the EAS in Singapore in November 2018. However, the complacency. Southeast Asia is particularly deal was abruptly suspended because of Indonesian important for the success of the Indo-Pacific concern over the Australian stance on Jerusalem. strategy: Indonesian senior officials indicated publicly that the deal would be put on hold until Australia clarified (or The Indo-Pacific power highway takes the pivot to be more precise, annulled) its decision to move its of world power away from the northern Atlantic Israeli embassy to Jerusalem (SBS, 2018). A month and shifts it to the southern and eastern coats of later, in a move seen as a compromise, the Australian the Asian landmass. It is here that the dynamism government announced that while it recognised of the world economy will course, and where the West Jerusalem as the capital of Israel, its embassy rivalries and alignments that shape the way the would still remain in Tel Aviv. It framed this decision world works will be played out. And one of the as a support for a two-state solution. The relocation key arenas of the Indo-Pacific is Southeast Asia. of the embassy would wait until Israel and Palestine Any of the rising or established powers that can reach a peace settlement via the two-state solution dominate Southeast Asia will dominate the Indo- (Bagshaw and Massola, 2019; Kwan, 2018). After Pacific and beyond. In other words, the pivot a delay of three months, Australia and Indonesia of world affairs is moving inexorably closer to managed to clear the hurdle and signed in early Australia’s northern coastlines (Wesley, 2011: 89- March 2019 the bilateral free-trade agreement. Upon 90). ratification by both parliaments, the IA-CEPA will reduce or remove tariffs on 99 percent of Australia’s Southeast Asian nations can now play a balancing trade with Indonesia, benefitting Australia’s role with regional great powers. To insure Australia’s agricultural and mining industries, higher education economic and security against vulnerability to over- and health service by opening a larger market in dependence on a single market, it is vital for Australia Indonesia (Hodge and Rayda, 2019). to actively engage with its neighbours, and Indonesia in particular due to its economic size and strategic A recent study has showed that the majority of the importance in fighting against terrorism. However, respondents (55 percent) in Southeast Asia welcome Australian-Indonesian relations are fragile. Its the Quad initiative and agree that it has contributed intervention in East Timor in 1999, the phone tapping to stability and peace in the region. However, if of Indonesian President Susilo Bambang Yudhoyono looking at the individual country among them, in 2013 and the recent recognition of West Jerusalem Indonesia is the most ambivalent towards the Quad. as Israel’s capital by the Morrison government, have Over 50 percent of Indonesians chose not to support adversely affected the bilateral relations between the Quad (Le Thu, 2018: 11). Indonesia may also be Canberra and Jakarta.21 dismayed by Australia’s condescending attitude toward it. In the Jerusalem spat, Liberal Senator As the largest Islamic state in the world, Indonesia’s Eric Abetz, who chairs the Senate Foreign Affairs, support for Palestine is not merely a debt of its Defence and Trade committee, implicitly expressed independence but also concerns religious identity a sense of ‘superiority’ over their Asian neighbours politics. In 1945, Jakarta received support from by highlighting the ‘poverty’ in Indonesia and Palestinian nationalists in persuading Egypt to threatening the withdrawal of Australia’s economic recognize Indonesia’s independence. Since then, aid to Indonesia. He reportedly tweeted: ‘If Indonesia Palestine has weighed in on Indonesia’s foreign really wants to dictate [Australia’s] foreign policy on policy. Jakarta often expresses its solidarity with the Middle East, should we rethink the [A]$360 million Palestinians over the Israel-Palestine conflict each year we give them in aid? Instead, how about (Fathana, 2018). In addition, the year 2019 is an we calmly finalise this [Free Trade Agreement (FTA)] election year for Indonesia. At the height of general which will lift many Indonesians out of poverty and and presidential elections, this ‘Islamic factor’ has assist Australian farmers and jobs’ (Peatling, 2018). already been showing its weight in Joko Widodo’s election campaign (Laksmana, 2018). Both countries Hence, while engagement plays a strategic role in were supposed to sign a bilateral free trade Australia’s foreign policy, the ‘superior’ mentality of agreement, Indonesia-Australia Comprehensive our policy makers has adversely impacted on the Economic Partnership Agreement (IA-CEPA), during success of Canberra’s strategic hedging in the Indo-

21 Other regional powers, such as Malaysia, also slammed Australia’s decision as ‘premature’ and ‘humiliation’ of the Palestinians and their quest for a homeland (Massola and Rompies, 2018).

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 15 Pacific. Australia not only missed the opportunity to In sum, with regard to the aforementioned hedging diversify its economic markets beyond China (soft spectrum, Australia’s current hedging policy is balancing against China’s economic clout), but also ‘under-hedging’. The weakest links are in the failures undermined the strategic partnership with Indonesia to institutionalise the Quad and to enmesh regional and other powers in the region. powers, notably India and Indonesia. Without enlisting more emerging powers solidly to its side, Australia is Conclusion often sidelined by other three members of the Quad and it is quite alone in the Indo-Pacific region. Seen Where should Canberra situate itself in the midst of in this light, this paper concludes that Australia is growing tensions between China and the US? There is far from over-hedging but is in fact slightly under- a better option than choosing between China and the hedging. The strategic discussion and thought within US and that is strategic hedging. As a combination the country is still clouded by the less helpful debate of engagement and indirect/soft balancing strategy, on whether Australia should align with China or the it is the most viable option for Australia to secure its US, without exploring enough the ‘Third Way’ of how economic growth and national security. The essence to reach out to regional powers closer to its home. of strategic hedging is to not choose between China and the US but instead to bring more partners to Australia’s side. The fear of China’s regional domination has grown out of two sources: (1) China’s growing hard power and assertiveness; and (2) the unpredictability of the Trump administration and its abdication of US global leadership. To insure against China’s regional domination, Australia should bargain and engage with it from a position of strength. A more formalised and institutionalised Quad can also serve as an attempt to keep US presence in the region and an enabler to strengthen security cooperation among four liked-minded states under the framework of the Indo-Pacific region. Working with and through the Quad is one of the best means for Australia to make it diplomatically stronger than it is right now. However, Canberra has so far not been very successful in establishing a formalised Quad institution, and it remains a distant goal.

Economically, while it is in Australia’s interest to continue its engagement with China, it should simultaneously diversify its economic partnerships in order to insure against any economic downturn in or sanctions from its largest trading partner. Australia’s participation in the RCEP and TPP-11 is part of a soft balancing policy to preserve its economic security from vulnerability to over-dependence on a single market. Australia should also actively engage with its neighbouring countries bilaterally, apart from through multilateral institutions. However, its insensitivity towards one of its key neighbours, Indonesia, has caused the country to miss the opportunity for soft balancing against China’s economic clout. On the other hand, being a member of the Five Eyes, Australia has to ally with other members, particularly the US, in building a constructive vigilance against state capitalism.

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W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 23 About ACRI

For the first time in its history, Australia’s most important economic relationship is with a nation very different in governance, politics and values. In the past, Australia’s dominating economic relationships had been with the British Empire, the United States and Japan.

Today our most important economic partner is China.

China contributes now more to world economic growth than any other country. China absorbs 34 percent of Australian goods exports. By 2030, 70 percent of the Chinese population is likely to enjoy middle class status: that’s 850 million more middle class Chinese than today.

In 2014, the University of Technology Sydney (UTS) established the Australia-China Relations Institute (ACRI) as an independent, non-partisan think tank to illuminate the Australia-China relationship. ACRI was formally launched by Australian Foreign Minister the Hon Julie Bishop.

Chinese studies centres exist in other universities. The Australia-China Relations Institute, however, is the first think tank devoted to the study of the relationship of these two countries.

The Prime Minister who opened diplomatic relations with China, Gough Whitlam, wrote in 1973: ‘We seek a relationship with China based on friendship, cooperation and mutual trust, comparable with that which we have, or seek, with other major powers.’ This spirit was captured by the 2014 commitments by both countries to a Comprehensive Strategic Partnership and the 2015 signing of a Free Trade Agreement.

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 24 About the author

Lai-Ha Chan

Lai-Ha Chan (Ph.D. in International and Asian Studies, Griffith University, Australia) is a Senior Lecturer in the Social and Political Sciences Program, School of Com- munication, Faculty of Arts and Social Sciences, University of Technology Sydney, Australia (e-mail: [email protected] and ORCID: http://orcid.org/0000- 0002-3851-8329)

Lai-Ha was a Fung Global Fellow in the Princeton Institute for International and Regional Studies, Princeton University, New Jersey, United States in the academic year 2016-2017. Since 2016, she has been an External Associate of the Centre for the Study of Globalisation and Regionalism, the University of Warwick, UK.

Her research interests revolve around global governance and China’s role in it, including public health, humanitarian intervention and international development. Her current research centres on China’s economic statecraft and infrastructure investment through the means of its Belt and Road Initiative, and their impact on regional order-building in the Indo-Pacific.

She is the sole author of China Engages Global Health Governance: Responsible Stakeholder or System-Transformer? (2011), and a co-author of China’s Engages Global Governance: A New World Order in the Making? (2012). Her peer-reviewed articles have appeared in Australian Journal of International Affairs (2016 and 2017), Global Governance: A Review of Multilateralism and International Organizations (2014), Review of International Studies (2012), PLoS Medicine (2010), Global Public Health (2009), China Security (2009), Third World Quarterly (2008) and Contem- porary Politics (2008). The last was awarded as the Best Article for the journal in 2008.

W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 25 Acknowledgements

The author is grateful to Pak K. Lee, James Laurenceson, Michael Wesley and Elena Collinson for their useful and constructive comments on earlier versions of this report. The excellent editing assistance provided by Elena Collinson and Michael Zhou is also gratefully acknowledged. The author is solely responsible for any remaining errors. Any comments on the report can be directly sent to: [email protected]

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